In an unrelated analysis, you have the opportunity to choose between the following two mutually exclusive projects, Project T (which lasts for two years) and Project F (which lasts for four years):

Expected Net Cash Flows

Year Project T Project F

0 ($100,000) ($100,000)

1 65,000 36,000

2 65,000 36,000

3 36,000

4 36,000

The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 11% cost of capital.

A. What is each projects initial NPV without replication?

B. What is each projects equivalent annual annuity?

C. Now apply the replacement chain approach to determine the projects extended NPVs. Which project should be chosen?

D. Now assume that the cost to replicate Project T in 2 years will increase to $105,000 because of inflationary pressures. How should the analysis be handled now, and which project should be chosen?